In the past couple of weeks, blue-chip issuers Taiwan Power and Taiwan Semiconductor Manufacturing Corp failed to attract sufficient orders on new issues and local dealmakers see these exceptional demand shortfalls as indicative of a negative shift in the Taiwanese debt capital markets.

The failures may have wider implications than just reduced transaction sizes for local issuers too. The island has the third largest mutual fund pool in Asia, as well as the third biggest insurance industry, with some US$500bn under management. As such, it is an important source of demand for fixed income all over the region.

A generally soft tone has prevailed in the domestic bond market since May, when US Federal Reserve Chairman Ben Bernanke first indicated that he would decelerate the central bank’s buying of US Treasuries.

But Taiwan’s bond market has taken a turn for the worse of late. The yield on the local 10-year government bond jumped 35bp to 1.77% on August 28, the highest level since November 7 2008. Government bond prices, which move inversely to yields, have recovered slightly, with the 10-year at 1.73% today, but the sharp move has spooked local investors.

The fear may be warranted. In a research note today, rating agency Standard & Poor’s said that: “Higher yields on bonds would lower the price of insurers’ existing bond portfolios and in turn weaken insurers’ reported equity levels.”

The result has been a slowdown of the new issue market. “A wait-and-see attitude dominates the market as people worry about the interest-rate trend once the US [quantitative easing] tapering starts,” said a local bond trader. “The general view is that the domestic interest rates will continue to rise in step with those in the US.”

UNDER PRESSURE

Taiwan Power’s August fundraising provided the first indication of the effect of the rising rates. The issuer priced a NT$3.87bn (US$117m) three-year corporate bond at 1.35% on August 28. Yet, market conditions forced the borrower to abandon the planned offerings of bonds at tenors of five, seven and 10 years.

Taiwan Power was forced to raise less than a third of its targeted NT$12bn as well. That is unprecedented for the country’s largest corporate issuer.

On top of that, the yield on Taiwan Power’s three-year paper was 5bp higher than expected.

This week, blue-chip Taiwan Semiconductor Manufacturing Corp. did not find conditions any easier. On Monday, the borrower sold a NT$4bn (US$121m) bond, after setting its sights on a fundraising of as much as NT$12bn.

In its fourth deal of the year, Taiwan Semiconductor Manufacturing Corp. priced a NT$1.4bn 5.5-year tranche at 1.6% and a NT$2.6bn 10-year at 2.1%.

Meanwhile, on its last visit to the market in July, Taiwan Semiconductor Manufacturing Corp. raised NT$12.5bn from an issue that comprised a NT$4bn four-year piece at 1.34% and a NT$8.5bn six-year piece at 1.52%.

BONDS TO LOANS

Bond bankers are especially concerned about market conditions because they fear that rising yields and more demanding investors will prompt companies to seek loans instead of issuing bonds. In fact, domestic loan liquidity remains ample with short-term rates stable in the past few months.

The 273-day Taiwan Treasury bill auction on Tuesday came at 0.5%, only slightly changed from the 0.488% logged on the last auction for the same tenor on July 24. That also means funding costs for banks remain fairly low, which, in turn, translates to cheaper loan rates, as well.

For instance, LCD screen-maker AU Optronics Corp is in the market with a NT$30bn five-year term loan at 75bp over the primary CP rate, a level that represents a yield of only 1.647% at current rates. (Reporting By Nethelie Wong; Editing by Christopher Langner and Timothy Sifert)